The Federal Reserve is doing an inspection on whether traders at the world’s largest banks rigged benchmark currency rates, increasing the risk that companies will be penalized for lax controls as regulators look for wrongdoing.
The Fed, which manages U.S. bank holding firms, is among authorities from London to Washington investigating on whether traders shared data that may have let them control and alter the financial values in the $5.3 trillion-a-day foreign-exchange market to maximize their earnings, said a person with direct knowledge of the matter, asking not to be named because it’s confidential. The central bank’s involvement in the probe hasn’t been previously reported.
“The Fed has discretion whether to and how much to fine the banks if deficient controls or lack of supervision resulted in traders at these banks manipulating currency rates,” said Jacob S. Frenkel, a former federal prosecutor and now a lawyer at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland.
The Fed punished companies for internal-control lapses last year as it worked with state and federal authorities on cases involving Iranian sanctions and botched derivatives bets. The foreign-exchange inquiry looks at benchmark WM/Reuters rates utilized by firms and investors around the world.
Those rates are determined by trades made in a minute-long period called “the fix” at 4 p.m. in London each day. By concentrating orders in the moments before and during the 60-second window, traders can push the rate up or down, a process known in the industry as “banging the close.”
‘The Cartel’
Deutsche Bank AG, Citigroup Inc., Barclays Plc and UBS AG control more than half of all foreign-exchange trading, according to a May survey by Euromoney Institutional Investor.
Barbara Hagenbaugh, a Fed spokeswoman in Washington, declined to comment on the probes.
Bloomberg News reported in June that traders at banks have been manipulating spot foreign-exchange rates for at least a decade, affecting the value of funds and derivatives. Britain’s Financial Conduct Authority, the Swiss Competition Commission and the U.S. Justice Department also are investigating.
At least a dozen banks have been contacted by authorities, and at least 12 currency traders have been suspended or put on leave. Companies including Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc have announced their own internal reviews of the matter.
Citigroup said last week it fired Rohan Ramchandani, who was head of European spot trading. Ramchandani was part of a message group other traders in the industry referred to as “The Cartel,” which is under investigation. He had been on leave from the New York-based firm for almost three months. Ramchandani didn’t respond to messages left on his mobile telephone, and his lawyer didn’t return a call to his office.
‘Bad Apples’
Fed supervision focuses on potential risks to banks and assesses a firm’s ability to “identify, measure, monitor and control these risks,” according to the central bank’s website.
The regulator examines banks for weaknesses that could affect their safety and soundness or violate laws. If lapses are found, it can send a report to the company, issue an order, impose fines, remove officers or directors and bar them from the industry. Its oversight can include international operations of U.S. banks and the U.S. operations of foreign banks.
The Fed will investigate whether any foreign exchange manipulation was due to rogue traders or a wider practice in a bank sanctioned directly or indirectly by management, said Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc., a Washington-based firm that does policy analysis on the financial services industry.
“The issue is are there any bad apples, how many are there and how rotten is the barrel?” Petrou said.
London Whale
The Fed fined JPMorgan Chase & Co., the nation’s largest lender by assets, $200 million last year after a U.K. trader known as the London Whale for his outsized bets lost more than $6.2 billion on botched derivatives transactions. The regulator cited deficiencies in the New York-based company’s risk management and internal controls. JPMorgan paid more than $1 billion in penalties tied to the trades, including settlements with the Commodity Futures Trading Commission, the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the U.K.’s Financial Conduct Authority.
Other recent Fed enforcement actions include a $50 million penalty last month against RBS, which is based in Edinburgh. The Fed faulted the firm for inadequate risk management and legal-review policies that are needed to prevent transactions with countries subject to U.S. economic sanctions.
Libor, ISDAfix
Authorities are looking for manipulation in a widening list of benchmark financial rates, including the London interbank offered rate, or Libor, and ISDAfix, used to determine the value of interest-rate derivatives.
“Because foreign-exchange regulation is largely nonexistent, the task falls to the Fed to use its regulatory powers to ensure that the banks address all controls associated with currency trading,” Frenkel said.
The Fed hadn’t traditionally focused on rate setting until the Libor-rigging cases, which embarrassed banking regulators, Federal Financial Analytics’s Petrou said.
Foreign-exchange dealers from the world’s biggest banks told the Federal Reserve Bank of New York the global probe into manipulation of currency rates could prompt an overhaul of the way they handle customer orders, minutes from the November 13 meeting released by the central bank show.
Currency chiefs from banks including JPMorgan, London-based Barclays and Citigroup met with six officials from the New York Fed at a meeting of the Foreign Exchange Committee -- an industry group sponsored by the New York Fed -- according to minutes released by the group.
“Private sector members suggested that any investigations and/or supervisory activity related to this subject could eventually result in recommended changes to best practice guidance,” according to the minutes from the meeting, which was hosted by JPMorgan.
